STEEL AUTHORITY OF INDIA LTD

RESEARCH

EQUITY RESEARCH July 01, 2009

RESULTS REVIEW Steel Authority of India Ltd BUY

On the road to recovery
Share Data
Market Cap Rs. 635 bn For Q4’09, Steel Authority of India Ltd’s (SAIL’s) top-line declined by
Price Rs. 153.65 12.1% yoy to Rs. 118.5 bn and EBITDA plummeted by 43.1% yoy to
BSE Sensex 14,645.47 Rs. 19 bn, mainly on account an 18.7% yoy fall in the average sales
Reuters SAIL.BO realisation. However, in the recent months, the domestic demand for steel
Bloomberg SAIL IN
products has increased, primarily due a rise in the infrastructure spending and
Avg. Volume (52 Week) 2.7 mn
the recovery in the key sectors. As per World Steel Association, in CY09 the
52-Week High/Low Rs. 186/55.25
Shares Outstanding 4,130.4 mn
steel demand in India is expected to increase by ~2% as compared to a
decline of ~15% in the global steel demand. We hold a positive outlook on the
Valuation Ratios (Consolidated) Company on the back of the recent recovery in steel demand and the steep
Year to 31 March 2010E 2011E decline in the coking coal prices. Thus, we give a Buy rating to the stock.
EPS (Rs.) 14.1 14.6 Renewed steel demand to fuel volume growth: We expect the Company’s
+/- (%) (5.6%) 3.5%
sales volume to increase by ~6% in FY10. The rise in construction activities
PER (x) 10.9x 10.5x
and the recovery in the Automobile industry has resulted in an improved
EV/ Sales (x) 1.3x 1.2x
EV/ EBITDA (x) 5.9x 5.2x
demand for steel. This demand has helped the inventory levels to decline from
2.25 mn tonnes at the end of November 2008 to 1.28 mn tonne at the end of
Shareholding Pattern (%) March 09. Simultaneously, the demand in the Real Estate sector has
Promoters 86 increased with the fall in the interest rates and sharp corrections in property
FIIs 4 prices. Thus, considering these factors and the early signs of recovery that the
Institutions 7
economy is displaying, we have upwardly revised our saleable steel sales
Public & Others 3
volume estimates for the Company to ~12 mn tonne in FY10.
Margins to improve: SAIL imports 70% of its total coking coal requirement,
Relative Performance
which accounts for 25–30% of the total cost that the Company incurs for
400
production, from international markets. The Company recently re-negotiated
300
200
its long-term contracts with global suppliers. According to the new contracts,
100 the Company will procure coking coal at USD 115-125 per tonne, which is
0
Key Figures (Standalone)
May-09
Aug-08

Nov-08

Apr-09
Jul-08

Sep-08
Oct-08

Dec-08
Jan-09
Feb-09
Mar-09

Jun-09
Jul-09

Quarterly Data Q4'08 Q3'08 Q4'09 YoY% QoQ% 2008 2009 YoY%
(Figures in Rs. mn, except per share data)
SAIL Rebased BSE Index
Net Sales 134,779 89,206 118,516 (12.1)% 32.9% 400,581 437,028 9.1%
EBITDA 33,437 11,287 19,035 (43.1)% 68.7% 91,250 85,178 (6.7)%

Adjusted Net Profit 21,811 8,433 14,764 (32.3)% 75.1% 74,907 61,643 (17.7)%
Margins(%)
EBITDA 24.8% 12.7% 16.1% 22.8% 19.5%
NPM 16.2% 9.5% 12.5% 18.7% 14.1%

Per Share Data (Rs.)

Adjusted EPS 5.3 2.0 3.6 (32.3)% 75.1% 18.1 14.9 (17.7)%
Please see the end of the report for disclaimer and disclosures. -1-
 STEEL AUTHORITY OF INDIA LTD
RESEARCH

EQUITY RESEARCH July 01, 2009

about 60% lesser than the previous rate. The revised rates are expected to
ease the Company’s pressures arising from high input costs. Thus, we expect
SAIL’s EBITDA margin to be ~22% in FY10 as compared to 19.5% in FY09.

Capacity expansion to fuel long-term growth: SAIL has embarked upon an

aggressive Rs. 540 bn capacity-expansion plan to increase its crude steel
production capacity by 10 million tonnes to 23.2 million tonnes by FY12. After
this expansion, the Company will have an improved product mix, comprising a
higher proportion of value-added products. This should help the Company
strengthen its leadership position and enhance its market share in India, which
is one of the fastest growing markets. (India has recorded a 10% CAGR since
2000 in steel production, compared with the world CAGR of 7%.)

Valuation

At the current market price (CMP) of Rs. 153.65, the stock is trading at a
forward P/E of 10.9x and 10.5x the FY10 and FY11 earnings, respectively.
Based on our DCF valuation, we have arrived at a target price of Rs. 181
(assuming a 15.4% WACC and a 5% terminal growth rate). At the CMP, the
stock provides an upside potentional of 18%. Thus, we give a Buy rating to the
stock.
As the DCF valuation is sensitive to the changes in WACC and terminal
growth rate, we have performed a sensitivity analysis of the same.

WACC (in %)
Terminal growth

14.4 14.9 15.4 15.9 16.4

3.00 188 177 168 159 151
(in %)

4.50 200 188 177 167 158

5.00 205 192 181 171 161
5.50 210 197 185 174 164
6.00 216 202 189 178 168

Please see the end of the report for disclaimer and disclosures. -2-
 STEEL AUTHORITY OF INDIA LTD
RESEARCH

EQUITY RESEARCH July 01, 2009

Result Highlights and Outlook

Demand revival to stimulate growth

In FY09, Net average
realisation increased by
16.3% yoy to Rs. 43,067
per tonne
For Q4’09, net sales declined by 12.1% yoy to Rs. 118.5 bn. Although the saleable
steel volumes increased by 3.4% yoy, an 18.7% yoy fall in the average sales
realisations dragged the top-line growth of the Company.

15 50,000

14
45,000

Rs per tonne
in mn tonnes

13
40,000
12

35,000
11

10 30,000
FY08 FY09 FY10E FY11E FY12E

Volume (LHS) Realisation (RHS)

Going forward, we expect steel volume to increase by ~6% in FY10, led by the
increase in the infrastructure investments and the recovery in the Automobile and
Real Estate sectors. On the realisation front, prices of hot rolled steel products
have declined ~13% since June 2008 to Rs. 38,833 per tonne. We expect the steel
prices to remain under pressure in the near-term, in tandem with the global trend.
Thus, we expect SAIL’s net sales to decline ~6% in FY10.

Margin to expand

For Q4’09, EBITDA tumbled by 43.1% yoy to Rs. 19 bn and the EBITDA margin
declined 8.7pts to 16.1%, mainly on account of the declining sales realisation and a
43.7% yoy increase in raw material prices. The hike in raw material prices is
attributable to rising coking coal prices, which tripled from USD 96 per tonne in
Q4’08 to USD 300 per tonne in Q4’09.

However, the Company has successfully re-negotiated its long-term coking coal
contracts at USD 115–120 per tonne. The steep decline in the coking coal prices

Please see the end of the report for disclaimer and disclosures. -3-
 STEEL AUTHORITY OF INDIA LTD
RESEARCH

EQUITY RESEARCH July 01, 2009

will result in an improvement of the Company’s margins. On the other hand, lower
realisation will result to an increase in fixed costs (as a percentage of sales), which
will drag the Company’s margins. However, the benefits from lower input costs are
expected to override the fall in the margins. Consequently, we expect SAIL’s
EBITDA margin to improve by 200–300 bps in FY10.

Net profit for Q4’09 decreased 32.3% yoy to Rs. 14.8 bn. Though the EBITDA
margin declined by 8.7 pts yoy due to increased input costs (up 43.7 pts yoy), the
net profit margin declined only 3.7pts to 12.5%, supported by a whopping 69.9%
jump in the interest income.

Key Figures (Consolidated)

Year to March FY07 FY08 FY09 FY10E FY11E CAGR
(Figures in Rs. mn, except per share data) (FY09-11E)

Net Sales 343,605 400,581 437,028 410,193 449,362 1.4%

EBITDA 78,610 91,250 85,178 90,658 102,858 9.9%

Adjusted Net Profit 62,115 74,907 61,643 58,191 60,234 (1.1%)

Margins(%)
EBITDA 22.9% 22.8% 19.5% 22.1% 22.9%
NPM 18.1% 18.7% 14.1% 14.2% 13.4%

Per Share Data (Rs.)

Adjusted EPS 15.0 18.1 14.9 14.1 14.6 (1.1%)
PER (x) 7.6x 10.2x 6.5x 10.9x 10.5x

Please see the end of the report for disclaimer and disclosures. -4-
 STEEL AUTHORITY OF INDIA LTD
RESEARCH

EQUITY RESEARCH July 01, 2009

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